Lenders and borrowers dance with disaster. Borrowers have the lead in the amend-pretend-extend fandango, but as the economy improves, along with lender balance sheets, lenders will take the lead. As the default shuffle plays out, wallflowers who chose not to cha-cha are wilting under the economic distress caused when the music stopped. Dancers are short on chairs.

It's part of a California subdivision built in the late 1980s, a mix of stucco and wood siding with mismatched fences. It looks like so many working-class suburban blocks.

But since the foreclosure crisis started, Riverside County, Calif., has ranked near the top of the list for its rate of homes being taken back by banks. This is a county that has long attracted Los Angeles refugees who drove east until they could afford to buy, then had to commute hours every day. Neighborhoods are hurting. Even people who didn't get swept up in the bubble have been hurt by the bust.

Dana Lane is one particularly hard-hit block in the city of Moreno Valley. There are hints of what its residents have been through — a broken window, for-sale signs and brown lawns.

More than two years into the housing bust, 20 percent of the homes on Dana Lane have gone into foreclosure, and residents here wonder who will be next.

It is difficult for us to relate in our elitist bubble here in Irvine, but prices have been crushed in neighborhoods where borrowers in default have been foreclosed from their homes. Many more foreclosures are yet to come.

Fall from entitlement

Anita Sandoval stopped paying her mortgage five months ago. …

The house across the street just went for $75,000 in a foreclosure sale.

"And I bought mine for $260,000, and it's the exact same home," Sandoval says. "I've been in the house. It's the exact same home." [Ouch!]

But that's not why Sandoval stopped making her mortgage payments. Her savings ran out, and she was finally hit with the painful reality that she and her husband really couldn't afford this house. They never could.

HELOC Abuse Riverside County Style

The Bubble Mindset

"Like everybody else, I'm in an upside-down loan," says Brenda Moore, who owes more than $300,000 on her mortgage. This is remarkable considering she bought her house in 1989 for $80,000. A search of public records reveals that Moore, a retired nurse, has refinanced her home eight times since 1998.

The loans are from a who's who of subprime lenders. With each loan she took out more equity, and each time the loan terms got worse.

"Hey, I had a lot of equity, so I would just go in there using it and having a lot of things done — outside and inside," Moore says.

Please, help me with the HELOC abuse grade. Based on her statement — and the fact that she quadrupled her mortgage — would you characterize her spending as thoughtless? She clearly rationalizes spending appreciation, so the grade is at least a D. But do you think she maintained her delusion that she was not spending her house? Or did she cross the line to earn an E?

Moore replaced a sagging fence. She put in new carpet and a tile floor in the kitchen. But that doesn't explain where all the money went. Most of it didn't go to tangible things;it went to raising her five grandchildren and two great-grandchildren even after she was no longer able to work.

At one point, Moore had just pulled out a chunk of equity when a family member passed away. She used the money to help pay for the burial.

"So that was a blessing because I had just — about a week [ago] — had just did the refi and was going to do some more work around the house, and that happened," Moore says.

Who are we kidding here? She blew the money on her entitlements. Even her justifications are weak. This woman spent the money obtained from her home through mortgage equity withdrawal as if this money were earned income. She carelessly managed her finances and created a Ponzi Scheme of debt. Her theft was enabled by her victim, so it is difficult to apportion blame, but there is plenty of guilt to go around. Is that character deserving of sympathy? And your tax money? Not that you have much choice in the matter….

When it got to the point that she could no longer make her mortgage payments, Moore thought about walking away.

But she says the Lord intervened. A nonprofit group helped her get a loan modification. Her payments have been cut in half. When a reporter tells her about the Betts family down the street, she seems a little surprised that there's anyone on the block who didn't refinance.

The Lord is now fostering moral hazard? The Lord wanted to bail this woman out rather than see her experience the consequences of her decisions? That isn't the Being I revere. A 50% reduction in payment means her modification is acting like an Option ARM, and this woman will be in foreclosure once banks stop dancing. I wonder if she will feel blessed then?

"So that's good they didn't have to," Moore says. "But then, too, I look at it this way: You're sitting on a bank, so if you can use it, use it because you can't take it with you, so enjoy it while you can."

Any of you that thought she earned a HELOC abuse grade of D rather than an E because you thought her spending was not thoughtless, do you want to rethink your grade?

My Heroes

[William and Laura Betts live on Dana Lane in the community of Moreno Valley, Calif. The couple stand out because they actually paid off their mortgage in 2005. William, who lost his job in November 2009, is glad they don't have to worry about making payments on their house.]

The bubble mindset here was infectious, but it didn't affect everyone.

William and Laura Betts stand out on Dana Lane. They've actually paid off their mortgage. They made their last payment in 2005 at the height of the refinance frenzy. It was a goal from the moment they moved in back in 1986.

"Payment was $750, I think, and the very first payment we sent in 10 extra dollars, and they sent it back because we had to pay at least a whole month's principle, and that was $15 or something — I forget the exact number, but it was more than we had sent in," says William Betts.

Resisting Temptation

Every month they sent in a little extra. They are Mormon and say their faith guided them to be fiscally responsible. Sure, they got calls from mortgage brokers who were eager to help them turn their home into an ATM. But they resisted. They weren't even tempted.

"I'd hear the commercials on the radio about OK, 'This is the ultimate refinance.' And then three months later, the same company and the same radio host was [saying], 'This is the ultimate final refinance,' " William Betts recalls. "And you know that things just can't keep going like they're going without something happening. You think, this is crazy, this is insane. These people — they're foolish." …

It didn't take a PhD in economics to realize the housing bubble was wrong. In fact, that is perhaps the most upsetting element of the entire injustice: anyone could have seen this coming if they chose to open their eyes.

When William Betts thinks about what's happened to this street, he doesn't resent his neighbors' choices or the nice furniture and granite countertops they bought with imagined equity. He just feels bad for them.

"How do I say this?" Betts asks. "Most of our neighbors, I think, sold their inheritance for a bowl of pottage. The Jet Skis are gone, and so is their house." …

I have stated the same many times; conspicuous consumption can be viewed with pity and astonishment rather than envy and jealousy.

Back in November, Betts lost his job. It's the second time in four years he and his wife have had to live off of savings and unemployment. But at least they don't have to worry about their home.

"I just remember the day that we signed the papers that the house was now ours," Betts recalls. "You know, I've slept pretty good every night since then, 'cause when you own your house, you never have to worry about where you're going to live."

That is inner peace emanating from true financial freedom, and it is this family's reward for showing fiscal discipline, ignoring the Joneses, and living a virtuous life. It is sad that they are getting punished for the insanity around them; worst of all, they are being forced to pay for it in taxes as well.

Home prices in this neighborhood may have bottomed — nobody knows. The Bettses' home is now worth little more than it was when they bought it 25 years ago — not much of a reward for doing everything right.

But that's not how the Bettses see it: "Be it ever so humble," says William Betts, "it's ours."

I respect everything these people thought, said, and did.

These are financial titans worthy of much more respect than fools like the Emperor of Irvine. Net worth isn't the value of assets you control, it's the difference between asset value and debt. Debt subtracts from wealth. Debt does not make people rich.

Responsible homeowners are NOT losing their homes.

To see the truth in this statement, one needs to have a clear definition of “responsible homeowner.”

A “responsible homeowner” is a buyer who, if they utilized financing, did not stray from the conservative parameters set forth by lenders (prior to the bubble) and financial planners. This includes using a maximum 28% debt-to-income ratio on the mortgage, at least a 20% down payment and fixed-rate conventionally amortizing financing.

Few who fit this definition are going to lose their homes; although, some of them may chose to walk away from the debt because they are hopelessly underwater. The only ones who fit the above definition who are in danger of losing their homes are those who lose jobs; they are the truly sad casualties of the housing bubble. Unfortunately, this is becoming more common due to the financial crisis caused by all the homeowners who borrowed irresponsibly.

Responsible borrowers are not the ones defaulting on their mortgages; irresponsible homeowners are.

If “responsible homeowner” is defined as a buyer who believed they could manage their monthly payment and did so until the loan terms changed, then by this definition, many responsible homeowners are going to lose their homes.

Almost everyone who signed up for a toxic loan thought they could make the payment; most did for a while. Many were convinced they could make the payments by a predatory lender out to make a few bucks on the origination. Many more believed they could supplement their incomes with the rapid appreciation they would enjoy as their house values rose to infinity. Does ignorance to their inability to sustain their housing payments make them responsible?

With so many Californians believing and acting like the irresponsible loan owners at the beginning of this profile, and with so few Californians believing and acting as our heroes, it becomes very difficult to foresee what the future holds. Contrary to popular belief that the housing bust is behind us, we are only in the 4th inning. The consequences of the bust — millions of foreclosures — have been delayed and deferred but not avoided. Will California kool aid survive the bust resulting in permanently inflated prices?

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Previous Owners

I am not sure how to grade these owners as HELOC abusers; the choices are D, E, or F. Please help me out.

They purchased the property on 4/29/2005 for $865,000. They used a $692,000 first mortgage, an $86,500 second mortgage, and an $86,500 downpayment. On 12/11/2007 they refinanced with an ARM for $852,000 which withdrew all but $13,000 of their downpayment that was subsequently lost. They defaulted about a year later:

Foreclosure Record

Recording Date: 08/10/2009

Document Type: Notice of Sale (aka Notice of Trustee's Sale)

Foreclosure Record

Recording Date: 05/04/2009

Document Type: Notice of Default

When these owners took out the new loan and withdrew most of their downpayment, what was going through their minds? If there were merely setting up a routine practice of equity extraction to fuel consumer spending, then they earn a D. If they took this money out carelessly, then they earn a E, but if they took this money out knowing they were likely to go under, then they gamed the system and earn an F.

54 thoughts on “Responsible Home Owners Are Hurt by Irresponsible Loan Owners”

IR, thanks for sharing the story of the Betts’. After the litany of fools we wade through every day, it is nice to be reminded that some good people are still out there. Notice how even the reported is skeptical of the value of paying off one’s mortage – as if owning a home free and clear were some irrational state.

I would be more than happy to contribute to the unemployment fund of the Betts’ family — if they need any help, they are more than deserving.

uh, aren’t we already paying into their unemployment income fund? I could have bought a new car with what the State of California just took from me. I hope that they spend it wisely. (like that’s likely)

also owning a home with no bank lien doesn’t mean that you’ll always have a place to live…you still have to pay your taxes. (also MRs and HOAs if you are in Irvine).

The Belts are the poster people for responsible home ownership. I have no beef with those who want to be life-long renters, but they have to realize that they will never be free of the cost of having a roof over their head, which in retirement may be a huge burden. Yeah, as an owner you still have the taxes and upkeep to deal with, but that is a fraction of the cost of the monthly rent payment. Lots of jusrisdictions (maybe not in CA) have reduced property taxes or property tax deferrals for low income seniors.

Like the Belts, I paid my home off in about 15 years (a goal from day one), and didn’t HELOC or refi cash out of it. Now as I look at my retirement budget I am about $1200/month net of taxes and manditory maintenance better off than if I were renting. In this finanical environment, where fixed income is paying <3%, I would have to have an additional $575,000 saved to fund that net rent payment. With all of the financial meltdowns and other set backs over the last 30 years, its is more likely than not that this would not have happened.

Furthermore, for a retiree, there is a great deal of comfort in knowing that for the forseeable future, I will only have to move when I desire to do so.

Homeownership done right can be a blessing, done wrongly, a curse. The choice is up to the buyer.

If you tell the average Joe that they could get a big bag of cash just for signing a piece of paper, most people will accept it without realizing the consequences.

Near the peak of credit bubble some time in 2006, a relative told me he had an offer for a $10,000 personal no-collateral loan from Citibank and wanted to take it. I asked him what he needed the money for, and reminded him that it was a LOAN that needs to be paid back. He said, “the spigot is flowing, so why not grab a bucket?”

HELOC abusers are no different. Everyone was cashing out and living the high life. Banks enabled it, people eagerly agreed to their terms, and everyone else is now paying for it.

I’d bet that some of those people are still living the high life by not paying their mortgages thereby freeing up additional cash each month, that is if they’re still employed.

“It is difficult for us to relate in our elitist bubble here in Irvine.”

I’m not sure it’s a matter of relating, it’s a mater of understanding. It might have something to do with the fact that down payments in Irvine are as large or larger than the price of houses in Riverside.

The wealth transfer that took place during the ongoing financial bubble went directly from areas like Riverside to the pockets of those who are currently buying in Irvine. Sure there are a few middle men in between, but those buying in Irvine now were winners of the financial bubble.

You have been reading the blog long enough to see the many cases of HELOC abuse and stupid mortgage borrowing here in Irvine. People here did not receive anything from Riverside County, and they are no different than the owners in Riverside County.

The two big difference between Riverside County and Irvine are (1) the timing of when the loans go bad and (2) whether or not the banks have foreclosed.

Irvine loans were alt-A and, prime, and Jumbo prime. Those loans are facing reset now, and owners are defaulting. Riverside County loans were subprime which blew up in 2007 and 2008. The loans in Riverside County were foreclosed on, and prices were crushed. The loans in Irvine have not been foreclosed on, and prices are still bubbly.

The bad loans from Riverside County are being processed through foreclosure; the bad loans from Irvine are being amended and extended. Riverside County is putting the problem behind them; Irvine is still facing its comeuppance.

Asset managers learned from the Riverside County experience, and they will try to release inventory slowly to stop prices from crashing, but the cartel arrangement is unstable, and a low grind of prices is likely.

The planet you inhabit where Irvine homeowners were fiscally responsible and thereby immune to the problems of Riverside County is not reality.

I made no mention of folks who bought in Irvine during the bubble. I am talking current Irvine buyers who are meeting the income and down payment guidlines in the current lending environment. However since you brought up bubble buyers it’s been shown here, mainly from the folks like Irvinerelator, that down payments were also plentiful during the bubble.

Riverside are a dime a dozen across the US. Measures that are designed to help these areas will always be fuel to the fire for prominent upscale areas like Irvine. The rich get richer. Unless you are like some of the people on this blog who think areas like SF are still supported by liar loans.. That’s a crock of you know what.

“Unless you are like some of the people on this blog who think areas like SF are still supported by liar loans.. That’s a crock of you know what.”

I do believe that SF is supported by liar loans and every other form of toxic financing because data shows that to be true. If you believe SF house prices are supported by incomes or people with cash, that’s a crock of you know what.

Some of those prices are indeed supported by salaries – two-income families making at least $150k per worker. No cushion whatsoever, unless they managed to save up a big downpayment. So watch out if anyone gets laid off and can’t quickly find another job at a tech company.

I bought in Santa Clara in 2002 fully expecting price deflation, and I am astonished it hasn’t happened yet. But the low-end condos have certainly reverted to their pre-2002 prices now, and I imagine they were financed with sub-prime loans; it’s a matter of foreclosures working up the food chain. As IR says.

On the other hand, prices in the Bay Area have been higher than in SoCal for many years, and one reason is that there are fairly tight restrictions on new building. This is NOT the case in SoCal, where the Irvine Company cheerfully knocks down a mountain and puts in 1000 McMansions any time it likes. So the supply-and-demand system may help sustain prices a while longer than in Irvine.

1. Go to Redfin.com
2. Type in zip code you are interested in
3. Do a search. Then pick any listing at random and click on it. Then click on the right hand picture to open a more details page for the listing.
4. Scroll to the bottom of the more details page and at the bottom under “Community and Schools” there is a zipcode Demographics link.
5. Click on the link for the demographics which include salary charts.

The transfer of wealth we are seeing is all going to the banking industry. As average Americans lose everything or try to get out of debt the banks are only going to come out heavier in cash. So when the market finally does hit a bottom they will begin to loan as much and fast as possible to reinflate prices. The banks win when everything is overly inflated becuase it forces consumers into debt just to live.
Everyone says the govt will do anything to prevent deflation. The real thing to say is the banks will do anything to prevent inflation.

You are extremely niave if you think the banksters are the only winners of the financial bubble.

I would even classify the folks who kept their jobs and have seen their incomes increase over the past 3 years as minor winners of the financial bubble. Depending on how smart they were with their assets they could be major winners. It’s one thing to identify the bubble, that takes a small level of intelligence. It’s another thing to profit off the bubble. That only takes a small additional level of intelligence in forecasting.

I wouldn’t call somone who kept their job a winner. Maybe lucky. Many people called the bubble but only a few made money making that call. I’ve only heard of 3 people who bet against the bubble making fortunes. I assume you were one of those people with a small level of intelligence planet reality? Or were you too naive?

What’s that? You say that will not happen? Or if prices do fall and the current owner is forced to sell, they could always rent it out since it’s at rental parity? In order for that to work out, you need to make some bold assumptions, and past history isn’t any indicator of how things will turn out. The current ‘situation’ is unlike anything we’ve experienced before.

If you already put your money where your mouth is, then good for you – I’m choosing not to. In five years if you’re right, I’ll admit that I was wrong and heck I’ll even buy you a beer.

What do you call this decorating style? NY city loft? It doesn’t go with the house. It’s uptown something. I don’t like it. But, I’m not living there. As for the location…hey you can walk right over to KFC/Taco Bell ;-P

I love the interior style – to each his own! If I was looking for a house in this price range I’d be scheduling a visit to this one just to see the interior. The kitchen looks a bit plain but everything else is sleek/modern.

The interior would go great with a tulip end tables, Barcelona chairs in the living room, Eames lounge chairs, and an Aalto vase of flowers (some modern design references for design geeks).

Actually I’m looking at ways to take some of the design chic from here to remodel my SO’s newly acquired condo. Anybody have tips on where to go for this style without breaking the bank?

It’s not as bad as it looks.
I’ve been in that track for quite some time, and, believe me, over time, you’d feel like there’s an ocean behind your backyard. Waves after waves of ocean are crashing in against your backyard wall. Who needs a Hawaiian vacation when there’s one to enjoy everyday. 🙂

Yeah, $680k was a good deal. That puts the price per sq. ft. around $296 or so. Because of the location, I don’t think the flipper will get close to $350/sq. ft. asking price which is about average for Westpark II.

This is a great neighborhood but this particular location sucks balls.

Great! Is there a book coming? 🙂
I’ll personally slap it against the faces of the banksters’ slaves we have in the Whitehouse and in D.C.
They all deserve it, for promoting and condoning irresponsibility, unaccountability and moral bankruptcy in this country.

I did not buy my house so I am neutral in this case, but I don’t blame her. I think it’s the bank problem to give her the loan. Also the government problem to bail her /or the bank out. I have a really nasty feeling for our so call “government officials”. To me they did very stupid, unfair things. If all of the bailout money were to put into creating jobs then the economic will be in much better shape and you guys don’t have to stay here complaining about this. Next time you better go vote these democrats OUT. They are simply STUPID.

We should trust neither republicans nor democrats. They are all corrupt, having no spine of their own.
Bernie Sanders, and, can anyone spell Jesse Ventura?
We need a different party. The two party system is so corrupt, beyond redemtion!

To expect ordinary house buyers to always make sound and rational decisions is as unrealistic as Greenspan/Bernanke’s naïve belief that Wall Street bankers (and economic agents) could self-police based on their own narrow self interest. Contrary to some of the standard text book economic theories (e.g., the now infamous efficient market hypothesis) would suggest, human behaviors, especially placed in the context of financial decisions, are often emotional, short-sighted and irrational, and tend to be highly influenced by the predominant social psyche and market environment. The sad truth is that in a society where so many have come to believe a person’s sense of achievement and self-worth is proportional to one’s possession of material things and ability to consume, the kind of behavior we witnessed during bubble era was actually perfectly normal under that cultural and social climate. The REAL problem is a highly deregulated financial system that feeds to the greed of our consumerism driven culture.

Given the chance a large % of ordinary citizens in this country would do what a Wall Street banker would do – milk the system. Not that human nature is inherently bad (I am not a believer of original sin and all that baggage), but you have to wonder what 20+ years of incessant exposure to our current social value system will do to a person’s mind.

i’m a first time homebuyer, new to the irvine market. we went to see this open house last weekend and were contemplating it, until we noticed on redfin it was sold in feb for $680k. where did you find all this information about 43 santa comba (forclosure info, loan details and exact figures)? is there something like a carfax for homes where i can research a home? any help is appreciated!

IR, I expect you to have better math skills.
“They purchased the property on 4/29/2005 for $865,000. They used a $692,000 first mortgage, an $86,500 second mortgage, and an $86,500 downpayment. On 12/11/2007 they refinanced with an ARM for $852,000 which withdrew all but $13,000 of their downpayment that was subsequently lost. They defaulted about a year later.”

Let’s do the math:
($13,000) loss of down after refin and FC.
+$42,000 free rent for 12M at $3500 month.
$29,000 net profit on invest of $13,000
ROI=2.23
If they didn’t refin, they would be out $44,500 = $65,000-42000.

With the refinance they’re ahead $29,000 instead of loss of ($44,500) without refinancing.

Plus the banksters get a $2500 bonus for each of these types of transactions. All winners except the renters and taxpayers.

Foolish Renter is just as bad as original 12.5% ($86,500) down:
both are out $42,000 with nothing to show. !

Now who get’s the D grade?
This works well if you have no problem sleeping at night (no conscience).
Why pick on these amateurs, when they’re folk taking out over $1 million equality and walking locally in NB and HB?

Nice looking house except the location. Maybe the REA can say the soothing mum will ease you to sleep, i.e., road noise.

“In a previous IHB post, our host posted
a graph with three scenarios for
the market getting itself out of a
bubble labeled ice, fire and
armageddon. I like that graph, and I
think that in reality, the graph shows
what has been happening in working
class, middle class and upper class
neighborhoods.”

IHB News 3-13-2010 Post

I think that fire has yet to fully
show up in the middle class
neighborhoods of SoCal, but it is
painfully obvious that working class
neighborhoods are in our host’s
armageddon scenario. In the real
upper class neighborhoods, I am
convinced that we will see an ice
scenario. You can see my reasoning in the earlier post. Even so, the bottom of
the ice scenario is not here yet until
all the wannabes are flushed out of
their underwater palaces.